At its February 15, 2017, meeting, the FASB discussed the results of its staff’s outreach and research on the accounting for nonrecurring engineering and preproduction costs and the presentation of customer reimbursements related to such costs. The outreach and research was performed following the Board’s October 19, 2016, meeting in which the Board decided to remove the proposed amendments to the guidance in ASC 340-101 (on the accounting for preproduction costs related to long-term supply arrangements) from its technical corrections and improvements project related to the new revenue standard (ASU 2014-092). Specifically, the Board discussed the following issues that were the focus of the outreach and research:
“Issue 1: What guidance should be applied upon the adoption of the new revenue standard to determine whether nonrecurring engineering and preproduction costs should be capitalized or expensed?”
The Board reiterated that “the revenue project did not include a comprehensive cost project” and therefore the new revenue standard “is not expected to resolve all existing diversity in practice in cost accounting.” At the November 9, 2015, TRG meeting, the FASB staff presented TRG Agenda Paper 46,3 which suggested that entities that are currently applying the guidance in ASC 340-10 would be expected to continue to do so after implementation of the new revenue standard. However, during the February 15 meeting, the Board acknowledged that diversity in practice exists in applying the scope of ASC 340-10 and believe that reassessing prior practices may be appropriate. Therefore, the Board also clarified that the scope guidance in ASC 340-40 “is not intended to preclude entities from reassessing their historical [cost] accounting,” nor does it require such an assessment. The Board instructed the staff to continue to monitor such diversity to determine whether further standard setting is warranted.
“Issue 2: Should customer reimbursements be presented as revenue or contra-expense?”
The Board noted that the new revenue standard provides a framework, similar to current U.S. GAAP, to apply when evaluating how customer reimbursements should be presented in an entity’s financial statements. That is, entities need to determine whether a preproduction contract is within the scope of ASC 606. The meeting handout (reproduced in part in the appendix below) includes a flowchart that depicts the process for evaluating how to account for reimbursements from customers within the scope of ASC 606. The flowchart also explains that entities may conclude that activities in a preproduction contract are not within the scope of ASC 606 if, for example, the “activities do not constitute an entity’s ongoing major or central operations[, which] may result in the reimbursement being recorded as other income or as contra-expense.” One board member cited current accounting for contributions in aid of construction (CIACs) in the utility industry as an area in which current practice (treatment outside of revenue) might be expected to continue upon adoption of ASC 606.